Royal Mail plc (RMG.L, the 'Company') today announces that it has reached agreement in principle with the Communication Workers Union (CWU) on pensions, pay, a shorter working week, culture and operational changes. We are also today providing an update on trading.

The proposed agreement has been considered by the executive of the union who recommend that CWU members vote in favour of it in an upcoming ballot. The proposed agreement has been approved by the Royal Mail plc Board.

Moya Greene, Chief Executive Officer, Royal Mail plc, said:

"This agreement marks a new chapter for Royal Mail and the CWU. Following the conclusion of a helpful mediation process and further talks, we have delivered the right result for Royal Mail and our stakeholders. This is an affordable and sustainable solution that enables us to continue to innovate and grow and to meet the intense competition with confidence.

"Royal Mail and the CWU will continue to work together as we build on our position as the leading delivery company in the UK. I'm pleased that, under this agreement, we will continue to offer the best terms and conditions in the delivery industry by some distance.

"Both Royal Mail and the CWU have shown that disputes can be resolved without recourse to damaging industrial action. Our people's commitment to serve customers throughout this period has allowed our good trading performance to continue. This means we now expect to deliver adjusted Group operating profit before transformation costs of at least £680 million for 2017-18."

Key points of the agreement:

Pensions

·

The Royal Mail Pension Plan (RMPP) will close to future accrual in its current form on 31 March 2018.

·

Royal Mail and the CWU have committed to work towards the introduction of a Collective Defined Contribution1 (CDC) scheme for all employees. This will be subject to necessary legislative changes being enacted. A Defined Benefit Cash Balance Scheme2 (DBCBS) will sit alongside it.

·

Transitional pension arrangements will be put in place from 1 April 2018 until a CDC scheme can be established. These comprise a DBCBS and an improved Defined Contribution scheme.

·

The ongoing annual cash cost of pensions will continue to be around £400 million.

Pay and shorter working week

·

From October 2017, employees3 will receive a 5% increase in pay (including base pay, overtime and allowances). This rate of pay will also apply throughout 2018-19.

·

From October 2018, there will be a one hour reduction to the working week (currently 39 hours), subject to completion of trials and implementation plans for a range of initiatives.

·

From April 2019, employees3 will receive a 2% increase in pay (including base pay, overtime and allowances) and a further one hour reduction to the working week from October 2019, subject to successful implementation of those initiatives.

·

Eligible part-time employees will, in addition, receive increases in their hourly rate of pay equivalent to c.2.6% in October 2018 and October 2019 to reflect the impact of the shorter working week.

·

Commitment to move towards 35 hour working week by 2022.

Culture and operational changes

·

As part of our strategy of ensuring a contemporary USO, the last letter delivery time will move back by 30 minutes to 3.30pm in urban areas and 4.30pm in rural areas.

·

Agreement on operational changes to enable later collections, processing and delivery of parcels, use of technology to enable further efficiency improvements and a pipeline review.

·

Review of the Agenda for Growth starting in 2019. The legally-binding undertakings on industrial stability and protections under the Agenda for Growth are ongoing and remain until 2020.

Trading update:

·

Our continuing good trading performance means that we now expect to deliver adjusted Group operating profit before transformation costs4 for 2017-18 of at least £680 million.

Further details of the agreement in relation to pensions, pay, a shorter working week, culture and operational changes, are set out below:

Pensions

The RMPP will close to future accrual in its current form on 31 March 2018.

Royal Mail and the CWU have committed to work towards the introduction of a CDC scheme for all employees, subject to the necessary legislative changes. A DBCBS will sit alongside it. The new arrangements will target, although not guarantee, providing a similar level of member benefits as the RMPP, while significantly reducing risk to the Company. The Company will contribute 13.6% of members' pensionable pay. Royal Mail and the CWU will lobby government to make the necessary legislative and regulatory changes so a CDC scheme can be established.

The Company will put in place the following transitional pension arrangements from 1 April 2018:

·

For RMPP members, Royal Mail will implement a DBCBS. The Company will contribute 13.6% of pensionable pay towards members' retirement lump sums, and a further 2% for other member benefits, including death in service and ill-health. Members will continue to contribute 6% of pensionable pay towards their retirement lump sums.

·

Members of the Royal Mail Defined Contribution Plan (RMDCP) with a minimum of five years' service will have the option of joining the DBCBS.

·

The Company will increase its contribution to the RMDCP at each standard contribution tier by 1 percentage point.

·

The Company will move current and future RMDCP members in the standard section of the plan to the top tier of contributions (10% from the Company and 6% from the member).

The transitional pension arrangements will remain in place until such time as the legislation enabling the creation of a CDC scheme comes into effect.

Pay and shorter working week3

From October 2017, there will be a 5% increase in pay (including base pay, overtime and allowances). This rate of pay will apply for 2018-19, meaning the 5% increase will cover the period from October 2017 to March 2019. From October 2018, there will be a one hour reduction to the working week (currently 39 hours), subject to the completion of trials and implementation plans for a range of initiatives. From April 2019, there will be a 2% increase in pay (including base pay, overtime and allowances) and a further one hour reduction to the working week from October 2019, subject to the successful implementation of those initiatives. The initiatives are designed to improve efficiency. Eligible part-time employees will, in addition, receive the equivalent of around a 2.6% increase in their hourly rate of pay in October 2018 and October 2019 to reflect the impact of the shorter working week. We have committed to move towards a 35 hour working week by 2022.

Culture and operational changes

As part of our strategy of ensuring a contemporary USO, the last letter delivery time will move back by 30 minutes to 3.30pm in urban areas and 4.30pm in rural areas. We have reached agreement on certain operational changes to enable later collections, processing and delivery of parcels, the use of technology to enable further efficiency improvements and a review of our pipeline.

As originally agreed, there will be a review of the legally-binding protections under the Agenda for Growth starting in 2019. Our commitments under the legally-binding undertakings on industrial stability and protections under the Agenda for Growth are ongoing and remain until 2020.

Trading update

Our continuing good trading performance means that we now expect to deliver adjusted Group operating profit before transformation costs4 for 2017-18 of at least £680 million.

Assuming that the agreement is ratified in its current form, the cash payment associated with the 2017-18 pay award will be made to employees3 during the first quarter of 2018-19. In the half year 2017-18 results, assumptions were made in relation to the 2017-18 pay award. The difference between these assumptions and the agreed pay award for 2017-18 will be reflected in UKPIL people costs for the full year. The impact of the shorter working week for full-time employees in 2018-19 and 2019-20 is not expected to increase costs materially.

The costs of the transitional and proposed pension arrangements are based on a fixed rate of contribution from the employer. As such, we expect that the overall cash cost to the Company of the transitional and proposed pension arrangements will continue to be around £400 million per annum.

This announcement contains inside information

Notes:

1 Collective Defined Contribution (CDC) schemes have fixed contribution rates from the employer and members, but pool investment and longevity risk between members. There is a target for what the employee will receive in retirement but this target is not guaranteed. The actual benefit payable will depend on the scheme's investment performance. There is no need for scheme members to buy an annuity on retirement, as the scheme pays the pension. But that pension, and any future increases to that pension, are not guaranteed, and will depend on the scheme's investment performance. The combination of these features makes for a more efficient design for members when compared with a pure Defined Contribution scheme, but with no benefit guarantees to be underwritten by the employer. The primary legislation for this type of scheme is in place (through the Pension Schemes Act 2015), but the secondary legislation has not been enacted. CDC schemes are already used in countries such as the Netherlands and Canada.

2 Under the Defined Benefit Cash Balance Scheme (DBCBS), the Company guarantees a minimum lump sum at normal retirement age. Members are guaranteed to receive the total value of the contributions paid towards their lump sum up to retirement. In addition, discretionary increases will be applied up to retirement, subject to the investment performance of the scheme. Once applied, these increases will also be guaranteed.

3 The agreement applies to employees in CWU represented grades in Core Operations, Logistics (excluding RM Fleet), Engineers, RMSS and Royal Mail International. It is subject to contract. Separate negotiations will take place for other CWU grade employees within Royal Mail as per current arrangements. It does not apply to Unite-represented grades. A separate agreement has been finalised between Parcelforce Worldwide and the CWU. Details of arrangements for RM Fleet and Parcelforce Worldwide employees are appended to the negotiators' agreement.

4 Adjusted Group operating profit before transformation costs is an alternative performance measure. This measure is based on reported operating profit before transformation costs further adjusted to exclude the volatility of the pension charge to cash difference adjustment, which Management considers to be a key adjustment in understanding the underlying profit of the Group at this level.

Figures presented in this announcement are not audited. This announcement contains certain statements that constitute "forward-looking statements". Such forward-looking statements involve known and unknown risks, uncertainties and other factors, which may cause the actual results, performance or achievements of the Group or industry results to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Persons receiving this release should not place undue reliance on any forward-looking statements.

The Group disclaims any obligation or undertaking to update or revise any forward-looking statements contained in this document to reflect any change in its expectations or any change in events, conditions or circumstances on which such statements are based unless required to do so by applicable law, the Prospectus Rules, the Listing Rules or the Disclosure Guidance and Transparency Rules of the Financial Conduct Authority.

About Royal Mail plc

Royal Mail plc is the parent company of Royal Mail Group Limited, the leading provider of postal and delivery services in the UK and the UK's designated universal postal service provider. UK Parcels, International & Letters (UKPIL) comprises the company's UK and international parcels and letters delivery businesses operating under the "Royal Mail" and "Parcelforce Worldwide" brands. Through the Royal Mail Core Network, the company delivers a one-price-goes-anywhere service on a range of parcels and letters products. Royal Mail has the capability to deliver to more than 30 million addresses in the UK, six days a week (excluding UK public holidays). Parcelforce Worldwide operates a separate UK network which collects and delivers express parcels. Royal Mail also owns General Logistics Systems (GLS) which operates one of the largest ground-based, deferred parcel delivery networks in Europe.